6/30/2013
The Arrow DWA Balanced Fund (DWAFX)
At the end of June, the fund had approximately 46% in U.S. Equities, 26% in Fixed Income, 16% in International Equities, and 12% in Alternatives. The U.S. equity markets pulled back in for the first couple weeks of June as the market continues to digest the likelihood of the eventual “tapering” of the Federal Reserve’s quantitative easing program which has served to hold interest rates down. However, the equity markets showed signs of stabilizing towards the end of the month. Most of our U.S. equity holdings held up relatively well in June, with some areas (Consumer Cyclicals) actually showing a small gain for the month. Small and mid-caps, which we own, also held up relatively well and continued to show positive relative strength compared to large caps for the year. U.S. equities continue to be an overweight in the fund. International equities pulled back even more sharply than U.S. equities in June. Developed international markets have been performing better than emerging markets this year and now all five of our current international equity positions are in developed markets (Mexico was replaced with Japan in June). Japanese equities pulled back sharply in May, but were actually positive in June and remain among the strongest international equity markets for the year. We had relatively weak performance in our alternatives (real estate and the currency carry trade). Our exposure to alternatives remains near its lower constraint of 10% of the fund. Interest rates made a pretty strong move higher in June and most sectors of fixed income declined. About half of our fixed income exposure is in short-term U.S. Treasurys and held up relatively well.
DWAFX lost 2.06% in June, but remains up 5.39% through 6/30/13.
We believe that a real strength of this strategy is its balance between remaining diversified, while also adapting to market leadership. When an asset class is weak its exposure will tend to be towards the lower end of the exposure constraints, and when an asset class is strong its exposure in the fund will trend toward the upper end of its exposure constraints. Relative strength provides an effective means of determining the appropriate weights of the strategy.
The Arrow DWA Tactical Fund (DWTFX)
At the end of June, the fund had approximately 90% in U.S. Equities and 9% in International Equities. Historically, it has been pretty rare to have this much exposure to U.S. equities in this strategy. The fact that U.S. equities have had the best relative strength compared to other asset classes is certainly a different picture that we saw for most of the last decade. It has become “normal” to say that the U.S. equity markets are in a structural bear market, but with the breakout to new highs this year it is quite possible that we may have transitioned to more of a structural bull market. Of course, one never knows how long any trend will persist and our methodology is designed to adapt regardless of how the future ultimately plays out. There was a pullback in the equity markets in the first couple weeks of June. Our U.S. equity holdings held up relatively well with Consumer Cyclicals actually showing a small gain for the month and a number of our other positions, including small and mid-caps, holding up better than large caps. We did remove a position to international real estate in June and it was replaced with more U.S. equity exposure. The rise in interest rates has not helped the performance of real estate and fixed income. Although this fund also has the ability to invest in commodities, we currently have no exposure to this asset class due to its weakness. Japanese equities pulled back sharply in May, but were actually positive in June and remain among the strongest international equity markets for the year.
DWTFX was down 0.67% in June and has gained 10.16% through 6/30/13.
This strategy is a go-anywhere strategy with very few constraints in terms of exposure to different asset classes. The strategy can invest in domestic equities, international equities, inverse equities, currencies, commodities, real estate, and fixed income. Market history clearly shows that asset classes go through secular bull and bear markets and we believe this strategy is ideally designed to capitalize on those trends. Additionally, we believe that this strategy can provide important risk diversification for a client’s overall portfolio.
See www.arrowfunds.com for more information.
